It's much easier to do the install on the testing server instead of just copying files. The installation process will setup all the required paths so you don't have to manually edit them. It is not likely that the paths on your testing server are the same as your remote server so you get the file missing errors.
After you have it working on your testing server, you can edit the files you want and then just copy the edited files over the remote files. Just don't copy over the configuration files.
If you go through the security setup on XAMPP you set a password for the directory. This is what is causing it to ask for the password. If this folder is not accessible from outside your network, it is probably OK to remove the password.
